The Global Crash And Forex Ideas

This is also a time of serious introspection in the Gulf. Crude oil prices are in free fall and the last global recession saw crude oil bottom at $15-20 in 2002. Credit card receipt data suggests gasoline demand in the US has simply collapsed and European, Japanese, Chinese and Indian demand has softened at a frightening pace. Credit is the lifeblood of share and property bull markets built on borrowed money and GCC credit markets are frozen in the ice age. This is the time to love cash, shed debt pronto.

Foreign exchange markets now do not trade on interest rate differentials but on credit crunch induced flows. The dollar has soared as American pension funds repatriate global investments. This is the reason the dollar soared against the Euro even as Paulson’s US bank bailout plan saddles Uncle Sam with a trillion dollar budget deficit. The surge in the yen against the dollar, Euro, Swiss franc and the South Korean won proves that fear is now the barometer and credit the constraint in the FX markets. As the US money supply contracts, US investors become net sellers of foreign equities and freezes in bank FX funding have all boosted the dollar against the Euro. The more money markets freeze (three month LIBOR is now 4.75 per cent and rising), the greater the USD cross-currency bid. A US recession means an import plunge and an increase in the US trade balance. Moreover, the plunge in crude oil and commodities mean the Black Death for the Aussie dollar, the Norwegian kroner, the loonie and the South African rand (where the new ANC leader Jacob Zuma adds to the lethal political cocktail).

Still, the dollar is overbought against the Euro at 1.35. Some normalcy on Wall Street will trigger a violent dollar sell-off as the US economy decelerates in a process whose endgame is recession. A Fed Funds rate of 1 per cent by the December FOMC is probable as the jobless rate spikes to 8 per cent. However, if the central banks succeed in their attempts to unfreeze LIBOR and the money markets, the dollar could get slammed next week.

The Euro was the natural whipping boy of the FX gnomes as the EU faced its own banking dominoes, recession data and nasty politics on the Irish bank bailout. Trichet had to swallow his Bundesbanker/hard money pride and cut interest rates on October 8 as Wall Street banking woes sent shock waves across the planet. But I believe the FX markets are now dangerously short Euro as the speculative IMM data suggests and that the central bank Neros cannot fiddle while the money market Rome burns, so a rising Euro to the 1.40-1.46 range to Christmas could be the next macro theme.

The Ministry of Finance cannot remain indifferent to yen strength above 95Y to the dollar as long as export orders plummet, jobless rates rise and the Nikkei Dow loses a quarter of its value in a week. With $1 trillion in revenues, the Japanese can easily intervene to defend 100Y, as they did in 2003-04. I expect the Bank of Japan will slash the yen money market rate to 0.25 per cent.

The carry trade has gone wrong with a vengeance (20 point moves in Aussie/yen in a week!) and cannot return as long as both Australia and New Zealand are cutting rates while commodities are in a bear market. If risk aversion does not fall (global markets stabilise, the Chicago Volatility Index drop from its shocking 70 level, Treasury/Eurodollar spreads soften), the yen could surge to 90.

My successive recommendations to short sterling against the dollar were vindicated with a vengeance. However, I now sell sterling against the Euro for a 0.82 target as Mervyn King will cut rates far more than Trichet. The UK faces a classic post property bubble recession and the woes of the City of London mean additional base rate cuts, possibly down to 2 per cent given the stresses in RBS (Sir Fred got shred!) and Barclays (diamonds are forever only if HM Treasury guarantees bank deposits). The bailout package for the banking sector and the October 8 rate cuts now signals that the Old Lady of Threadneedle Street will play ball with the sterling bears. So while cable could drift higher to 1.84-1.86, sterling is a goner against the Euro and Swissie.

I had recommended shorting the South African Rand a year ago when it was 6.5 against the dollar. The Rand has plunged to 9.3 against the dollar as Thabo Mbeki’s resignation, the carnage in commodities and the South African current account deficit has spooked offshore investors. Yet I believe that the Rand has now bottomed out and look to the risk aversion pendulum to swing back to the 8.50/8.70 range. The Turkish Lira is anchored by the highest real interest rates on the planet and is a buy at any levels at 1.40 to the dollar. The plunge in crude oil is nirvana for Turkey and inflation will peak somewhere in the next six months. While the Indian Rupee could hit 50 as FII flee Dalal Street, the $70 plunge in oil since July, strong FDI/domestic growth and an inflation peak could make 49-50 an attractive entry point for INR for a 45 target.